As the government has previously confirmed, from January 1, 2027, the CBAM will be charged on emissions embodied in certain goods when they are imported into the UK. On April 24, 2025, HMRC published draft legislation on the UK’s CBAM. This has been published for technical consultation and is not a further policy design consultation but is focused on ensuring the legislation meets the policy intent. The consultation was published alongside a policy update (the “Policy Update”) which provides an update on decisions taken by ministers since the October 2024 government response to the March 2024 consultation (see our article on the 2024 consultation).
The new materials build upon the October 2024 response, providing further detail, clarification, and some new provisions in relation to CBAM policy, including with regard to implementation and related criminal offences. In this briefing, we summarise where the rules currently stand, highlighting key changes that have emerged through the consultation process. All references in this briefing to CBAM are to the UK CBAM unless otherwise stated.
What is in scope?
CBAM will apply to specific aluminium, cement, fertiliser, hydrogen and iron and steel goods. The draft legislation includes a detailed schedule of the commodity codes in scope, with explicit exclusions such as for imported aluminium, iron and steel scrap. Although the April 2024 consultation had considered the inclusion of glass and ceramics, the October 2024 response concluded that these were less emissions intensive than the other sectors within scope and relatively less exposed to carbon leakage risk. These would therefore be left out of scope of CBAM for now but would be considered for inclusion later.
This brings the UK CBAM more in line with the EU CBAM, with the main difference in sector coverage compared to EU CBAM now being the exclusion of electricity from the scope of UK CBAM. The Policy Update notes that the product scope will be kept under review beyond 2027 to reflect evolving carbon leakage risk and technological context, as well as changes to feasibility of extending CBAM to further sectors or goods.
Who is liable for CBAM?
A person must register with HMRC for CBAM if they meet or exceed the minimum registration threshold. The person liable is the importer of the relevant goods. This will usually be the person in the customs declaration or the person on whose behalf the declaration is made. Where there are no customs controls, the importer is the person on whose behalf the good is imported. Tax agents can be appointed to submit CBAM returns; however, they cannot register on behalf of the liable person and no liability attaches to them.
To mitigate against disproportionate administrative burdens, the minimum registration threshold is currently set at GBP50,000 (rather than the GBP10,000 originally proposed). By contrast, the European Commission considers that mass, rather than monetary value, is a better proxy for the embedded emissions of importers. The European Commission’s recent omnibus simplification package includes a proposal to introduce a mass-based annual cumulative threshold of 50 tonnes per importer under the EU CBAM. It remains to be seen if the UK and EU will eventually align on their de minimis exemptions.
There is also an exemption for those importing CBAM goods “otherwise than in the course of a business”, such that private individuals importing CBAM-covered goods into the UK for non-commercial purposes will not be liable for CBAM.
To determine the liability start date, both forward and backward-looking tests have been included in the draft legislation. These provide that liability begins: (i) on the day that the total value of CBAM goods imported over the next 30 days is expected to meet or exceed the GBP50,000 threshold; or (ii) on the first day of a month when the total value of CBAM goods imported over the last 12 months met or exceeded the threshold. The legislation gives the importer 30 days from the day they trigger liability to register for CBAM (although the Policy Update notes that, in the first year of CBAM, businesses will have longer to register). The draft legislation also includes more details on the process and criteria for deregistration.
There are detailed provisions on when a good is “imported” for the purposes of CBAM. The Policy Update clarifies how CBAM liability is determined when goods are processed into other goods, exported, or re-imported, and how these scenarios affect the registration threshold. As per the October 2024 consultation response, there is an exemption from CBAM for goods that are imported into the UK using returned goods relief.
A new concept introduced in the draft legislation is “group treatment”. Two or more connected liable persons (who must be body corporates under the same control, with at least one established in the UK) can apply to HMRC for group treatment. This allows for a group representative, who must be UK resident or have a permanent establishment in the UK, to submit returns and pay CBAM liability on behalf of the group. Importantly, all members of the group will be jointly and severally liable for the tax due where this group treatment mechanism is being used.
How is CBAM calculated?
The CBAM charge is calculated by multiplying the imported embodied emissions by the sectoral domestic carbon price to be published quarterly by the UK Treasury. Relief is given for goods that have been subject to a deductible carbon price. It is confirmed that only explicit carbon prices that place a price per tCO2e directly on greenhouse gas emissions produced are deductible (whether in the form of a carbon tax with a fixed price or under an emissions trading scheme with a market-based price), and that the government will allow carbon pricing schemes using standardised emissions factors to be deductible.
The government intends to require liable persons to hold verified evidence of all carbon price deductions they claim on their return. By contrast, the Commission’s omnibus package includes a proposal to reduce the administrative burdens under the EU CBAM through determining default carbon prices per country, while maintaining the possibility of claiming reductions based on certified evidence of actual carbon prices paid.
There are more details included on how emissions are to be measured, although the fundamentals remain the same as were laid out in the March 2024 consultation. For instance, both direct and indirect emissions are in scope, as are emissions embodied in certain pre-cursor goods, with the liable person having the option to use either actual data on embodied emissions or default emissions values. It is confirmed that the domestic carbon price will take into account free UK ETS allowances available to each sector. The Policy Update provides further information on calculating CBAM liability, including illustrative examples, noting that further provision on these points will be made in regulations.
The government has agreed to consider the use of international agreements or arrangements to ease compliance, especially in relation to claiming carbon price relief. The draft legislation provides flexibility to allow for this, for instance regulations may be introduced specifying different evidence requirements if any such agreement or arrangement is in place.
Consistent in particular with the UK’s and the EU’s commitment to give serious consideration to linking their respective carbon pricing systems, the draft legislation also empowers the Treasury to confer an exemption for jurisdictions that enter into arrangements to link their ETSs with the UK ETS. Goods covered under this exemption would not need to be reported on CBAM returns and would not contribute to the registration threshold.
CBAM compliance
An online CBAM return must be submitted after the end of each accounting period from the time a liable person becomes registrable. Nil returns will be required (unless the liable person is de-registered). The first accounting period will be 12 months, from January 1, 2027 to December 31, 2027, with returns and payments due five months after the period ends (May 31, 2028) to allow businesses (and HMRC) more time to get relevant systems and processes in place.
From 2028, accounting periods will move to quarterly, with a two-month return and payment window (rather than the one month originally proposed).
More information on what must be included in the return will be set out in regulations, although the Policy Update notes that this will include commodity codes, weights, total emissions embodied in imported CBAM goods, as well as information on any effective deductible carbon price applied.
Regulations will also set out what records will have to be kept and how long these must be kept, although this may not exceed six years from the end of the relevant accounting period or the date of creation (as applicable).
Penalties and a new criminal offence
HMRC’s existing powers and penalties are to be extended to cover CBAM, with penalties applicable for (amongst other things) failing to register for CBAM, failing to pay CBAM liabilities, failure to submit returns or making errors in returns, and failing to keep relevant records.
The draft legislation introduces a new criminal offence of fraudulent evasion of CBAM, plus new criminal offences in relation to misstatement in relation to CBAM, including producing, providing or making use of false documents with intent to deceive or knowingly or recklessly making false statements.
New measures are also being introduced to prevent artificial separation of business activities to circumvent CBAM. In addition, CBAM is added to the list of taxes covered by the indirect tax disclosure rules (DASVOIT), which could give rise to an obligation to disclose schemes designed to avoid CBAM.
What next?
The draft primary legislation is open for consultation until July 3, 2025, with the intention that the legislation will be introduced later this year. The Policy Update confirms that further detailed guidance will be provided in advance of CBAM’s commencement on January 1, 2027, and that delegated legislation will be published in draft for technical consultation before implementation.
Matters to be addressed in delegated legislation and guidance include:
- Further detail on monitoring, reporting and verification of emissions.
- Default emissions values, which may be set for a single year or multiple years.
- Methodologies for determining the weight of CBAM goods (which the government intends to explore with industry and stakeholders).
- What it means for emissions to be attributable to the production of a CBAM good and how that is to be evidenced.
- Verification of deductible carbon prices and methodologies for calculating effective carbon price incurred.
- Information needed to register for CBAM.
- Methodologies for calculating value of CBAM goods.
HMRC has established a CBAM Joint Industry Working Group for those most affected by CBAM. In addition, terms of reference for a CBAM International Group have also been published to help HMRC engage with other governments on CBAM.
For a fuller discussion on the UK CBAM and the EU CBAM or to access our bulletin(s) on related regulatory topics, please contact the authors of this bulletin.
